In recent weeks, several EU member states have committed to climate neutrality by 2050. However, this goal requires massive investments. To encourage the financing of climate-friendly business activities, the EU is focusing on the development of a Green Bond Standard. Find out what's happening on the front lines in this overview article.
December 12, 2015, was the day the Paris Climate Agreement was agreed upon. It aims to ensure that global warming is limited to well below 2°C above pre-industrial levels. For the EU, the treaty means a 40% reduction in greenhouse gas emissions by 2030, and to reach that goal, an investment gap of about 180 billion euros per year will need to be filled, according to the European Commission. You can imagine that this sum cannot simply be raised overnight.
Financing the sustainability goals
To close the investment gap, the EU does not want to and cannot rely on the public sector alone. For this reason, institutional investors are now to be encouraged to channel financial flows into low-carbon and climate-resilient projects and sectors of the economy. This ambition is among the main objectives of the EU Sustainable Finance Action Plan, published on March 22, 2018. One of the priorities of the Action Plan is to "develop official European Sustainable Finance Standards, starting with Green Bonds." With the help of a committee of experts, the key points of a possible EU Green Bond Standard are to be identified and published in a report.
EU Green Bond Standard: The report of the expert committee
In March 2019, the expert committee published an interim report and three months later the final report. The report presents the content of the EU Green Bond Standard and explains how the EU GBS aims to break down the barriers that currently hinder developments in the green bond market. Additionally, it describes how the standard can fulfill its function of guiding investments in green projects. Furthermore, the report details the incentives that can be used to increase the amount of green bonds issued and how it interacts with other sustainable finance instruments in the broader context. The TEG has announced that the EU GBS is envisaged as a voluntary standard that builds on and is compatible with existing market practice.
The EU Taxonomy
As described above, the Green Bond Standard is intended to channel financial flows into low-carbon and climate-resilient projects and sectors of the economy. But where does one draw the line between climate-friendly and non-climate-friendly business activities? This is where the EU Taxonomy comes in: along with the report, the expert committee published the Taxonomy Technical Report, a classification system that determines how climate-friendly individual projects and activities are. Essentially, the Taxonomy is nothing more than a list of business activities that contribute to climate change mitigation and adaptation, such as low-emission transportation, renewable energy generation, biofuel production, etc.
Verification of Green Bonds by External Verifiers
To ensure that Green Bonds are credible, external verification is mandatory. Accreditation for external verification is provided in the report. As an experienced verifier, we are following developments with great interest.
How does the EU Green Bond Standard relate to the Climate Bonds Initiative?
The EU taxonomy takes into account existing standards and initiatives, such as the Climate Bonds Initiative. This means that investments that carry a Climate Bonds certification, for example, should be recognized by the European initiative without major difficulties. Climate Bonds certification thus simplifies certification to the EU Green Bonds Standard and gives issuers the opportunity to demonstrate the sustainability of their investments even before the European standard is published. Dual certification with the EU Green Bond Standard and Climate Bonds certification is possible.
The reports of the expert committee are recommendations that have been handed over to the European Commission. It is expected that a European Green Bond Standard will be developed on this basis in the relatively short term.